China will create an open, competitive domestic foreign exchange market and should let a flexible exchange rate mechanism regulate the impact of cross-border capital flows, a deputy head of its foreign exchange regulator has said. China should also let the exchange rate play a more fundamental role in foreign exchange resource allocation, regulating cross-border flows, and balancing international payments, Fang Shangpu said in an article on Thursday in a publication owned by the foreign exchange regulator.
China has made moves to open its domestic foreign exchange markets to foreign investors while at the same time stepping up controls on money leaving the country as it looks to support the yuan. The State Administration of Foreign Exchange (SAFE) this week said it would let foreign investors trade forex derivatives in its interbank bond market for the first time.
"(China should) increase the depth of the foreign exchange market, increase the number of trading tools and market participants, and establish a multi-tiered and inclusive trading platform," Fang wrote. But Fang said China should "strengthen checks of banks' foreign exchange business to ensure authenticity and compliance", reiterating SAFE's call for tighter controls of capital outflows, which have contributed to a weakening yuan and the drawdown of forex reserves.
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